Research On The Relationship Between CEO Equity Based Incentives And The Company Acquisitions

For a long time,acquisition is the highlight and hot topic in corporate finace research,because of competitive pressure and profit driven motivation,the M&A activity between companies increase year by year,expansion through mergers and acquisitions has become the only growth strategy of company.Acquisition is the largest risky investment activity that the company are going to take,it can have a significant impact on the value creation of shareholder wealth,whether to participate in M&A is animportant investment decision to managers.With the growth of economic scale and frequency of M&A,researchersare exploring to find why managers initiated acquisitions?Early studies focused on the causes of economic efficiency,such as the advantages of scale economy and scope economy,monopoly power,financial and operational synergies,financial advantage,from potential stock profit and deal with the transformation of the business environment of the strategy.From this point of view,the motivation of M&A is to maximize the wealth of shareholder.However managers are self-interested individuals,they are not only effective in the control of the company,at the same time,but also they can make decisions and take action based on their own interests,managers may try to make empire building on their own private at the expense of the interests of the shareholders,in exchange for the increase of their personal wealth.The separation of ownership and control in modern enterprises caused the agency problem,effective corporate governance mechanism will motivate managers to make good behavior management,compensation incentive and supervision of the board of directors is the most commongovernance mechanism to solve the agency problem of corporate.Shareholders connect the interests of shareholders and managers wealth together through the executive compensation incentive contracts,as an effective long-term incentive to solve the agency problem and reducing agency costs,make the management to make the optimal investment decisions.Wheather the compensation incentive mechanism design and implement reasonable or not directly affect the behavior of the company executives,investment as a result of the company's executives decision-making,is bound to be affected by the impact of compensation incentive mechanism.Most of the enterprise investment compared with the enterprise scale is relatively small,and mergers and acquisitions is observable long-term investment behavior compared with the major enterprise,so merger and acquisition investments has become an ideal platform for test the relationship between the motivation and efficiency of investment decision of managers.M&A provides managers with an opportunity to make the decisions based on shareholder value maximization or to entrenche and expand their compensation through mergers and acquisitions which make agency conflict problem serious.Can managerscompensation contract portfolio effectively solve the agency problem between managers and shareholders?Will managers'compensation incentive affect the enterprise's M&Adecision-making?Can the CEO compensation contract reduce the non-value-maximizing behavior of acquing managers?This paper is aim to explain these questions through research on the relation between CEO compensation and company acquisitions.So far,most of the theoretical and empirical research on the management of compensation incentives come from the western developed countries,especially come from the United States where the capital market,corporate governance level is relatively high,the legal system is relatively good.While China is in the transition of the economic system,with the special government background(the control of large shareholders,capital market of the risk of uncertainty,corporate governance mechanism has flaws and so on),this make the Chinese listed company executive incentives and M&A behavior affected by many factors.Is western executive incentive theory applicable in China?Compared with the western developed countries,do the relation between China's listed companies CEO incentive and corporate mergers and acquisitions have different characteristics?At present there is no domestic researcher make a systematic research,this provide me the opportunity to do the research on relation between the CEO compensation incentive and the company acquisitions,this paper aims to have a better explain angle by the research on the relation of CEO compensation incentive and the company M&A behavior.This paper use the unique investment event of company merger and acquisition(M&A),from two part,one is before the acquisition how the CEO pay incentives affect corporate mergers and acquisitions decesionsand the other is afeter mergers and acquisitions the CEO compensationchanges to empirically test the the relationship between CEO pay incentives and corporate mergers and acquisitions behaviors.In the first part,through the listed company M&A events empirical analysis the effect of CEO compensation incentives on the decision of launching acquisition,acquisition premium and acquisition performance in order to verify whether CEO equity incentives can reduce non-value-maximizing behavior of acquing managers.At the same time,combined with China's listed company's salary incentive problems that exist in the actual,put the uncertainty,the board characteristic,shareholder characteristics and CEOemotional characteristics into the research framework of incentive compensation and merger and acquisition behavior,designed to test these factors influences on relations of CEO compensation incentive and acquisition.In this paper,the empirical results are summarized as follows:(1)Using the sample of merger transactions of the Listed Companies from 2008 to 2014,this paper examines the effect of equity based incentives on acquisition investments by Logistic model,results show that the intensity of executive stock incentives significantly increase the acquisition possibility;We also examine the effect of uncertainty,CEO overconfidence and the role of board structure on the relationship between CEO equity based incentives and acquisition decisions.Finally we find that the uncertainty significantly positively affects the relation of CEO equity based incentives and acquisition investments;importantly,the positive relation betweenequity based incentive and acquisitions just confined only to non-overconfident CEO subgroup;the board structure significantly affects the association between equity based incentives and acquisition decisions.The board of directors as an important corporate governance mechanism can significantly affect the relationship between equity incentive and acquisition decision-making.CEO dual increase the positive correlation between CEO equity incentives and acquisition decision-making,CEO with big powers under the equity incentive more easily initiated mergers and acquisitions;and independent directors and board size decreased significantly positive correlation between equity incentive and acquisition decision-making.The effect of equity incentive on acquisition decision-making is dependent on the environment of corporate governance.(2)Using the sample of acquisitiontransactions of the listed companies from 2008 to 2014,this paper examines the effect of equity based incentives on acquisitionpremium by pool OLS model,results show that equity incentive mechanism can indeed reduce the managersagency costs in the decision of acquisition premium,it can incentive acquiring managers make efforts and negotiation with the target company on the acquisition premium to maximizethe shareholder value.But the effect of CEO equity incentive is affected by the manager's personal emotional characteristics and the company's internal governance structure.For CEO overconfidence,equity incentive can not reduce agency cost,CEO with non rational emotion will lead to the cognitivedeviation,overestimate their own decision-making ability and underestimate the risk of acquisitionfailure,this make them pay higher premium in merger and acquisition.characteristics of the board can affect the effect of CEO equity incentive,independent directors can enhance the effect of CEO equity incentive,while the CEO dual will reduce the negative impact of equity incentive on acquisition premium;The large shareholders of private enterprises have the motivation and ability to supervise the management decision-making,strengthen the negative effect mechanism of CEO equity incentive on acquisition premium.(3)Using the sample of merger transactions of the listed companies from 2008 to 2013,this paper examines the effect of equity based incentives on acquisitionperformance by pool OLS model,results show thatthe intensity of CEO stock incentives are positive related to the bidder announcement returns and the bidder long term value creation.Further,we also examine the effect ofuncertaintyon the relationship between CEO equity based incentives and the bidders value creation,when the bidders under greater uncertainty,the uncertainty can reduce the positive relationship of the equity based incentives and acquisition performance;under greater uncertainty the independent directors significantly positively affectthe association between equity based incentives and the bidders value creation.CEO duality significantlynegativeaffectthe association between equity based incentives and the bidder long term value creation.The supervision effect of shareholders can adjust the relationship between CEO equity incentive and acquisition performance,the higher the first shareholder shareholding proportion,the stronger the positive correlation between CEO equity incentive strength and acquisition performance.There are mainly three possible invovation in my paper:(1)Innovation of research content.This paper use the company merger and acquisition which is observable unique investment event,adopting"event study",launched a comprehensive study on the listed company management incentive compensation and merger and acquisition activity relationship.Combined with the analysis of compensation incentivetheory,reveals the executives equity incentive mechanism of mergers and acquisitions investment decision for enterprises,this paper enriches the research in the fieldsof manager incentive and corporate mergers and acquisitions.(2)Innovation in the perspective of research.To investigate the influence of other factors on executive compensation and the M&A activity,this article first take corporate governance structure,uncertainty and CEO emotional characteristics into the research framework of CEO incentive andacquisition,this provides new ideas and perspectives to managerial compensation incentive research,rich the company governance theory and behavioral finance theory.Also based on perspective of family firms in mergers and acquisitions,this paper deeply research the family company merger and acquisitioninfluence on CEO compensation,test the different decision of family CEO compensation and non-family CEO after acquisition?help us have a deep understanding of the differences between family and non family companies in acquisition decision-making,the conclusion of this paper also enriched the family of companies and company acquisitions related areas of research.(3)At present,there was few domestic researcher use acquisitionsevent to study executive compensation incentive mechanism,and domestic researchers only research on the impact of cash compensation on mergers and acquisitions.Since 2008,the equity incentive of listed companies began to develop,after 2010,there was a substantial increase.This paper use the sample of The listed companies in 2008 to 2014 acquisiton events reveals how the CEO equity compensation incentive effect M&A activity,first time providing new empirical evidence about the relationship of the executives incentive compensation and merger and acquisition.